When you are deep in debt and juggling multiple monthly payments, debt consolidation into just one loan can be a source of relief. However, you must avoid these common debt consolidation mistakes.
Debt consolidation loans can also be a valuable tool for getting out of debt with less money paid in interest and more efficiently. But as with any obligation, mismanaging your debt consolidation loans can negatively impact your finances and credit. To ensure debt consolidation is a win, not a burden, avoid these five common debt consolidation mistakes.
1. Not Working on Your Credit First. Your credit significantly impacts the interest rates lenders charge you, so moving to improve your credit before applying can mean saving thousands of dollars over your loan life. Below are some boxes to check before shopping for debt consolidation loans:
- Check your credit report. Ask for your credit report copy without charge for a peek at what lenders see, including your payment balances, history, a mix of accounts, and inquiries on your statement.
- Look for errors. You have the right to discuss information on your report that you do not recognize or believe is potentially fraudulent.
- Look at your credit utilization rate. If you use more than thirty percent of your available credit on your credit cards, aim to pay down your balances before applying.
- Wait a few months. Enhancing your history by making on-time payments for a few more months can increase your credit score. If you can wait to pursue debt consolidation, doing so could aid you in getting better terms.
2. Not Considering All Your Options. A debt consolidation loan is only one strategy for paying off your debt. Also, consider these other methods:
- Create a payoff plan. Use the debt avalanche strategy or the debt snowball strategy to decide which debts to prioritize paying off first. This can help you save money in interest and stay motivated.
- See a credit counselor. If you are struggling with budgeting, saving, managing debt, and other finance moves, working with a credit specialist can help you chart a course moving forward. Consider the Law Offices of Ronald E. Stadtmueller. We aim to help you achieve freedom from debt and start fresh. Let us evaluate your current financial situation and discuss the options available so you can regain control today. Contact our get-out-of-debt law offices in San Diego to schedule your free consultation.
- Ponder on a balance transfer card. If you have good credit, a balance transfer card can be an excellent tool for paying off your debt and saving money on interest. Balance transfer cards charge fees for transfers. However, you may need a high credit limit to cover all your debt.
3. Going Deeper Into Debt. A debt consolidation loan can aid you in wrangling your debts into just one loan. This relieves the immediate burden of many balances and payments due. But this sense of comfort can also worsen your situation if seeing your credit card balances decrease to zero encourages you to spend more. Avoid winding up any credit card balances after you consolidate. Otherwise, your situation will turn out to be buried in more debt.
4. Taking on a Higher Interest Rate. Pleating your debts into a debt consolidation loan would not save you money if the new loan charges more interest. In order for a consolidation loan to be in your financial boon, its rate must be lower than the average interest rate on the card balances you must consolidate. That notifies you of what your debt is costing you entirely. To understand what you are paying, you will want to take your debts weighted average.
5. Not Getting to the Source of Your Debt. What a debt consolidation loan is: it is a tool for decreasing your monthly payments and paying less interest. What it is not: a magic eraser. Make sure you are getting to the root of how you ended up in debt. If overspending leads you into a debt spiral, institute a new plan for building financial stability, living within your means, and sticking with a budget.
When a debt consolidation loan is perfect, your best bet is to shop for the most beneficial terms and rates before applying. An efficient way is to see debt consolidation loans matched to your credit profile. You will see loans from partners tailored to your goals, and you will be able to view and compare rates and terms in a straightforward hub.